Economics Forecasts July 2011 – Guessing how the quake rebuild will pan out

There remains considerable uncertainty about the size and timing of the rebuilding effort required in Christchurch and the surrounding areas. This article outlines our current working assumptions for the timeline of activity across the various construction types.

Our very early assessment of February’s earthquake in Christchurch was that the damage looked likely to be about 2 ½times the extent of the first major earthquake that struck in September last year. Although the aggregate numbers that The Treasury is currently working with concur with the relative effects of the two quakes, we now believe that our baseline assessment of the September quake’s cost was on the low side. Asa result we have substantially revised up our estimates of the total cost of rebuilding.

Having had more time to develop our projections, we have also worked on developing a more realistic profile of the timing of the rebuild work across the various construction types.

New dwellings

We have allowed for 12,000 houses to be completely rebuilt as a result of the quakes at an average cost of $210,000each (this figure excludes any land costs). We estimate that the total construction cost, in December 2010 prices, will be about $2.5bn.

Recent announcements from the government identifying some streets and suburbs that will not be rebuilt within the next few years indicate that major decision-making processes are gradually being advance. However, the EQC and insurance assessment process remains a drawn-outdone. In the case of properties where a house is deemed to be uninhabitable and the damage is estimated at over $100,000, EQC can be removed from the equation pretty quickly.

Early rebuilding work is likely to be focused on replacing houses damaged by the September quake in the Selwyn and Waimakariri districts, as these areas seem to have been less affected by the February quake and subsequent aftershocks. We expect new house building activity to accelerate most rapidly between June 2012 and June 2013, with activity peaking by December 2014. We expect 50% of work to be completed by September 2014, 80% by June 2016, and 95% by March 2018.

Some of the major candidates for housing displaced Christchurch residents are located outside the Christchurch city boundaries, including Lincoln, Pegasus, and Rolleston. Although there are other subdivision possibilities within Christchurch (eg Aidanfield, Prestons, and Wigram), we note that a significant proportion of residential rebuilding may not take place in the city itself.

Residential alterations and additions

The difficulty with estimating the level of "alterations and additions" work that will occur as a result of the quake is that a significant portion of repair work will not require a building consent. Plastering, painting, and many other repairs will only be dependent on insurance assessments and pay-outs and the subsequent availability of trades-people.

We have made an allowance for a total of$7bn of residential repair work, with 45% (or $3.2bn) being captured in official work put in place numbers. Non-consented work is likely to get going more quickly than work requiring a consent, focused on easy fixes and remedial work to make damaged houses comfortably and safely habitable. Large repair jobs that allow a house to be lived in again are also likely to be given relatively high priority, while mid-range jobs that are more about convenience and comfort than safety may be further down the list.

We expect residential repair work to accelerate most rapidly between March 2012 and March 2013, with activity peaking by March 2015. We expect 50% of work to be completed by March 2015,80% by June 2017, and 95% by June 2019.

The profile of non-consented work is likely to be more advanced than the above timeline given the less complex and costly nature of work that falls outside the consent process.

Non-residential building

Non-residential building work will be largely concentrated in the Christchurch CBD. In our view, moving the city’s is an unlikely prospect. But even if the decision to rebuild in the same area is made relatively quickly, considerable issues of planning, design, and coordination will need to be worked through before reconstruction can get underway. Furthermore, the spectre of difficult demolition jobs such as the Hotel Grand Chancellor will mean that some areas will be off-limits until the danger of collapse has been eliminated, which could easily be until the middle of 2012.

We have allowed for $3.1bn of on-residential rebuilding work to take place. However, there are considerable risks to this figure given the relocation of businesses out of the central city. The longer that the CBD remains out of action, the more accustomed people will be to working and obtaining services from suburban centres instead, and the weaker the business case will be for substantial rebuilding in the city centre. In some cases, building owners will simply take their insurance pay-outs and invest the money elsewhere.

At this stage, we expect non-residential building work to accelerate most rapidly between June 2012 and June 2013, with activity peaking by September 2015. We expect 50% of work to be completed by September 2015, 80% by December 2017, and 95% by June 2019.

Infrastructure

The infrastructure repair bill will be mostly made up of four main components repairs to:

roads (mostly local roads rather than state highways)

water, wastewater, and storm-water networks and processing facilities

the electricity network

the port facilities at Lyttelton.

There will also be some limited expenditure on the rail network as well.

The initial response has been focused on providing immediate solutions to infrastructure and network problems to ensure that, where possible, people have access to essential services, and that facilities are working as well as possible given the considerable damage they have sustained. More permanent repairs and upgrades will start to be undertaken once the immediate infrastructure problems have been resolved.

We have allowed for $4bn of spending on infrastructure work in Canterbury over the next decade. The timing of this work is very uncertain given the lack of any good information we have on infrastructure spending at the best of times. Furthermore, it is difficult to gauge how much of the immediate response work will be superseded by less time-critical repairs further down the track.

Bearing this uncertainty in mind, we expect infrastructure work to accelerate most rapidly between March 2012 and March 2013, with activity peaking by June 2014. We expect 50% of work to be completed by September 2014, 80% by December 2016, and 95% by March 2019.

Risks to our timing assumptions

The risks to the timing of repair work across each of the building categories are slightly different.

Delays around building assessment and decisions about where rebuilding is not able to occur could lead to a slower start for the construction of new dwellings. However, we also recognise that ensuring people are not stuck in unliveable conditions for an extended period of time will be a high priority for officials, so we also see scope for new residential building work to be completed sooner than we have currently assumed. On this basis, we judge the risks to be reasonably balanced, but we note that it is difficult to envisage a much faster build rate than our peak of 2,960 additional consents. We also note that temporary housing solutions are, at this stage, an unknown piece of the puzzle.

Residential alterations and additions work also has the potential to be delayed by the insurance assessment process. We may have underestimated the extent to which some problems with houses are being immediately addressed, but this work is unlikely to be consented and therefore won’t show up in official work put in place numbers. Once insurance pay-outs have been received, the biggest constraint on how quickly work can progress will be the availability of trades-people. We judge that the risks to our forecasts of residential repairs are weighted towards the pipeline of work being dealt with more quickly than we have allowed for.

The risks around the timeline for non-residential construction are significantly weighted towards activity taking longer to get underway, and longer to be completed, then our current assumptions suggest. The persistence of aftershocks for another year could limit progress towards reconstruction during that time. And as indicated above, the process of rebuilding the CBD is a complex one with significant coordination issues to be worked through. Assuming there is not a wholesale relocation of the CBD, were comfortable that all demolished buildings will eventually be replaced in one form or another. However, there is a considerable risk that the rebuild stretches out over 20 years. Vacant sites could persist for long periods of time until new landowners are willing to enter the market and develop sites left empty by previous owners choosing not to rebuild.

The critical nature of electricity, water, and wastewater networks suggests that the level of infrastructure activity could be higher than we have allowed for in the short-term. We are confident that work in some areas will continue for a considerable period of time, with Orion indicating a ten-year plan for strengthening the city’s electricity network, and Lyttelton Port stating that it expects repairs to take up to five years to complete. Overall, we judge that the balance of risks lies towards more infrastructure work being undertaken earlier than we have allowed for.

In summary, the overall balance of risks around our rebuilding assumptions appears to be reasonably balanced. We will continue to monitor developments in Christchurch over coming months and make adjustments to our assumptions about the size and timing of the rebuild if required.

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